Moral Hazard in Baring PLC

Barings PLC, a British merchant bank, was bankrupted in 1995 by Nick Leeson's (a derivatives trader for the bank) futile bets against the future level of the Nikkei index. In October 2010, Jerome Kerviel, a rogue derivatives trader for Societe Generale, a French Bank, was sentenced to prison for five years for causing the bank a 4.9 billion euro loss by betting on futures linked to European stock markets. Do you think the banking system can take steps to insure itself against the risk associated with the implicit moral hazard in these type of situations?

Solution Preview

In both of these situations, we have one commonality - governance. The striking question that must be asked is, "where was the governance in each of these financial institutions?" There was a clear lack of oversight, which tells us that the corporate governance and proper segregation of duties in respect to authorizing transactions was deplorable. If this had not been the case, these two incidents would have never progressed to the level that each did. With that aside, we can look at the moral hazard in these types of situations.

Let's specifically look at Nick Leeson. When we consider moral hazards, we have to first consider the individual and his or her moral system, which mainly includes the person's moral beliefs, ethics, and values. Nick worked for Barings PLC, but it was already documented that he was unable to obtain a broker's license in Singapore because parts of his application for the license were found to be fraudulent. After this, he was arrested for indecent ...